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In the spring of 2020, the Hungarian State Audit Office („HSAO”) dealt in two of its analyses with the digital economy. The HSAO came to conclusions – probably not surprising to those concerned– that may foreshadow the directions of legislation in the near future.

1. On the taxation of the digital sector

According to the current taxation provisions, the various countries exercise their taxation powers based on physical presence. In the case of digital economy, however, it is hard to define the place where the value forming the basis of the tax arises, what exactly qualifies as such value and how it should be measured.

The HSAO found that the international companies belonging to the digital sector pay much less tax compared to the actors of the traditional economy in correlation with their profit and they do not pay taxes where they create added value. Therefore, among others Hungary receives much less tax revenues after the activities of companies providing cross-border digital services „than what would be fair”.

The HSAO referred to the OECD’s and the European Union’s („EU”) proposals in connection with taxing the digital economy. At the same time, the HSAO noted that some EU Member States and the USA dispute these proposals.

The HSAO came to the conclusion that, if no special tax would be introduced on EU-level but some other Member States creating such taxes would prove successful, „it might be subservient” to introduce a similar tax in Hungary in order to ensure that companies providing cross-border digital services pay taxes proportionately to the value created within the country.

2. On the broadening of Internet commerce

Having analysed the 2010-2018 period, the HSAO established that the number of commercial transactions arising through the Internet, the average cart value and average yearly online turnover per online customer have been rising in parallel with Internet usage.

The HSAO found that the increasing turnover in the fields of commerce, freight forwarding and storage is linked to a decreasing number of undertakings and that the majority of this turnover is generated by foreign-owned companies.

The HSAO’s analysis identified certain risks as to VAT collection, consumer protection, tax evasion, the acquisition of unfair market advantages, customs control and the collection of customs duties. EU and Hungarian legal amendments have decreased these risks but could not eliminate them.

The HSAO emphasized the current relevance of its analysis by referring to the tendency connected with the coronavirus pandemic. Namely, some retailers plunged into e-commerce while customers tend to order online. In relation to this, domestic-owned undertakings’ share of e-commerce turnover may show an ongoing rise.

With regard to the above, the HSAO foresees the long term, continuous growth of Internet sales that may amount to further developments in connection with e-commerce (e.g. in the fields of electronic payment systems, logistics, freight forwarding).

Considering the above-mentioned changes, the HSAO holds the renewal of the EU and Hungarian regulatory environment of e-commerce even timelier.

Collating the two analyses, we understand that

• In the field of digital services, international companies are increasing their presence in Hungary. At the same time, these companies do not voluntarily choose to pay taxes here because Hungary is not one of the countries having the most favourable tax regimes.
• In parallel, the number and e-commerce turnover of domestic undertakings is growing while their share in e-commerce is decreasing.
• The regulatory environment is better than it used to be but it will improve even further (according to the HSAO’s value judgment). In particular, one may expect the introduction of a „fairer” taxation of multinational companies providing digital services and the modifications to the regulatory environment of e-commerce. Therefore, stakeholders should keep an eye on newly arriving amendments.

Krisztián Tivadar, LL.M.

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